176 ❖ Chapter 9/Application: International Trade
6. a. Figure 10 shows the market for grain in an exporting country. The world price is
PW
.
Figure 10
c. An export tax will increase domestic consumer surplus, decrease domestic producer
surplus, and increase government revenue.
as a result of the tax.
7. a. This statement is true. For a given world price that is lower than the domestic price,
quantity demanded will rise more when demand is elastic. Therefore, the rise in
b. This statement is false. Quantity demanded would remain unchanged, but buyers would
pay a lower price. This would increase consumer surplus. Domestic producer surplus will
c. This statement is false. Even though quantity demanded does not rise when trade is
allowed, consumer surplus rises, because consumers are paying a lower price.
Chapter 9/Application: International Trade ❖ 177
8. a. Figure 11 shows the market for jelly beans in Kawmin if trade is not allowed. The market
equilibrium price is $4 and the equilibrium quantity is 4. Consumer surplus is $8,
producer surplus is $8, and total surplus is $16.
Figure 11
surplus is $25.
Figure 12
is $24.
d. When trade was opened, total surplus increases from $16 to $25. The deadweight loss of
the tariff is $1 ($25 − $24).
178 ❖ Chapter 9/Application: International Trade
9. a. Using Figure 4 from the text, the quantity demanded will fall to
Q
2
D
, the same quantity
demanded under the tariff. However, quantity supplied will not change because the price
sellers receive will be the world price. Thus, quantity supplied will remain at
Q
1
S
.
b. The effects of the consumption tax can be seen in the table below:
World price
World price + tax
CHANGE
Consumer Surplus
A + B + C + D + E + F
A + B
–C – D – E – F
Producer Surplus
G
G
None
Government Revenue
None
C + D + E
C + D + E
Total Surplus
A + B + C + D + E + F + G
A + B + C + D + E + G
-F
c. The consumption tax raises more government revenue because the tax is on all units
(not just the imported units). Thus, the deadweight loss is smaller with the consumption
tax than with a tariff.
10. a. When a technological advance lowers the world price of televisions, the effect on the
United States, an importer of televisions, is shown in Figure 13. Initially the world price
of televisions is
P
1, consumer surplus is A + B, producer surplus is C + G, total surplus is
A + B + C + G, and the amount of imports is shown as “Import1”. After the improvement
in technology, the world price of televisions declines to
P
2 (which is
P
1 – 100), consumer
surplus increases by C + D + E + F, producer surplus declines by C, total surplus rises
by D + E + F, and the amount of imports rises to “Import2”.
Figure 13
P
1
P
2
CHANGE
Consumer Surplus
A + B
A + B + C + D + E + F
C + D + E + F
Producer Surplus
C + G
G
–
C
Total Surplus
A + B + C + G
A + B + C + D + E + F + G
D + E + F
b. The areas are calculated as follows: Area C = 200,000($100) + (0.5)(200,000)($100)
= $30 million. Area D = (0.5)(200,000)($100) = $10 million. Area E = (600,000)($100)
= $60 million. Area F = (0.5)(200,000)($100) = $10 million.
Chapter 9/Application: International Trade ❖ 179
Therefore, the change in consumer surplus is $110 million. The change in producer
surplus is -$30 million. Total surplus rises by $80 million.
c. If the government places a $100 tariff on imported televisions, consumer and producer
surplus would return to their initial values. That is, consumer surplus would fall by areas
C + D + E + F (a decline of $110 million). Producer surplus would rise by $30 million.
The government would gain tariff revenue equal to ($100)(600,000) = $60 million. The
deadweight loss from the tariff would be areas D and F (a value of $20 million). This is
not a good policy from the standpoint of U.S. welfare because total surplus is reduced
after the tariff is introduced. However, domestic producers will be happier as they benefit
from the tariff.
d. It makes no difference why the world price dropped in terms of our analysis. The drop in
the world price benefits domestic consumers more than it harms domestic producers and
total welfare improves.
11. An export subsidy increases the price of steel exports received by producers by the amount
of the subsidy, s, as shown in Figure 14. The figure shows the world price,
P
W, before the
subsidy is put in place. At that price, domestic consumers buy quantity
Q
1D of steel,
producers supply
Q
1S units, and the country exports the quantity
Q
1S –
Q
1D. With the subsidy
put in place, suppliers get a total price per unit of
P
W + s, because they receive the world
firms do not want to sell steel to domestic customers, because they do not get the subsidy
for doing so. So domestic companies will sell all the steel they produce abroad, in total
quantity
Q
2S. Domestic consumers continue to buy quantity
Q
1D. The country imports steel in
The end result is that the domestic price of steel is unchanged, the quantity of steel
Figure 14
180 ❖ Chapter 9/Application: International Trade
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Thus, it is not a good policy from an economic standpoint because there is a decline in total
surplus.
With Subsidy
CHANGE
Consumer Surplus
A + B
0
Producer Surplus
B + C + E + F + G
+B + C
Government Revenue
–B – C – D
–B – C – D
Total Surplus
A + B – D + E + F + G
–D